Regulating Stability: Global Lessons and Technological Solutions for India’s Stablecoin Challenge
- CCL NLUO
- Sep 8
- 7 min read
Authors: Pranav Athreya and Om Chandak
Fourth year student at National Law University, Mumbai
I. Introduction
Stablecoins are cryptocurrencies stabilised against external reference assets, such as fiat money, are becoming programmable solutions for frictionless payments and global value transfer. The global stablecoin market capitalisation has increased above USD 246 billion as of mid‑2025, and market analysts expect further growth as regulatory clarity enhances markets.
At the same time, India is a world leader in crypto adoption, ranked top globally in two consecutive years of adoption indexes, underscoring the demand for digital assets among its people. Ironically, the Reserve Bank of India is being cautious, raising concerns for monetary sovereignty, systemic stability, and illegal financial flows. The absence of a specialised legal framework on stablecoins has led to a policy vacuum, while its technological adoption is increasing.
This blog seeks to close that gap. It will rigorously analyse five fundamental regulatory issues India grapples with in regulating stablecoins, spanning from capital control risks to payment categorisation gaps. Relying on international regulatory best practices—such as corridor-based restrictions, reserve auditing requirements, and compliance standards set in jurisdictions such as the U.S., EU, and UAE—the blog will then demonstrate how these frameworks may be operationalised using AI and blockchain analytics. As it does so, it promotes a hybrid regulatory framework: one that combines statutory clarity with live, data-driven supersight, allowing India to safely and strategically tap stablecoins' promise.
II. India’s Current Legal Framework and Regulatory Challenges
Stablecoins are now being viewed as a newly acceptable way of conducting international transactions. It recorded a total transfer volume of USD 27.6 trillion. Multi-national companies such as JP Morgan, Standard Chartered Bank, Visa, etc., are gearing up for this development. Nations are also making regulatory changes to match the growth of stablecoins, as recently the US, through the Guiding and Establishing National Innovation for US Stablecoins Act (hereinafter known as the ‘GENIUS Act’), has taken a step forward in terms of regulating stablecoins. However, in India, the absence of a dedicated regulatory framework and the RBI’s intent to preserve monetary sovereignty by promoting its own central bank digital currency (the digital rupee) act as a hurdle, keeping India in the backseat of this development. India has provisions governing virtual currency, but falls short of stablecoins.
Virtual Digital Assets (hereinafter known as ‘VDAs’) are taxed under the Income Tax Act, but are still not classified as legal tender, nor do they fall within the scope of the Payment and Settlement Systems Act for regulated payment instruments. They are taxed, so that the number of transactions and the value of the transaction are being recorded. To keep a check on VDAs' transactions, Virtual Asset Service Providers (hereinafter known as ‘VASPs’) are required to register with the Financial Intelligence Unit–India (hereinafter known as ‘FIU-IND’) under the Prevention of Money Laundering Act, 2002. However, no stablecoin-specific prudential or operational requirements exist, leaving a significant compliance gap. In India, cross-border remittance is governed through the Foreign Exchange Management Act, 1999 (hereinafter known as ‘FEMA’), but stablecoin remains a grey area under FEMA, which creates the risk of the RBI treating it as an unauthorised transaction.
There are primarily 5 major hurdles that need to be addressed. Firstly, stablecoins have the potential to undermine monetary sovereignty by facilitating cross-border transactions, which can also result in a potential threat of unofficial/unrecorded transactions. Secondly, the unwillingness of investors due to a lack of statutory reserve backing and public transparency requirements raised solvency and liquidity concerns. Thirdly, anti-money laundering and counter-terrorism financing oversight is weakened due to pseudonymous wallet structures and India’s limited implementation of the Financial Action Task Force’s “Travel Rule,” which hinders identification of beneficial owners in cross-border transactions. Fourthly, there is a lack of an early-warning infrastructure to analyse and detect systemic risks arising from large-scale redemption runs or loss of peg parity. Lastly, a legal vacuum still exists in the classification of stablecoins, as they remain unrecognised as legal tender or security.
III. Comparative Global Regulatory Models
Jurisdictions have started regulating stablecoin, with the US being the newest to the List, GENIUS Act. The framework helps us in solving the problem of statutory reserve backing and public transparency requirements. It mandates a clear 1:1 asset backing, which ensures that the redemption will be at par under any market condition, and public monthly disclosures create verifiable trust, enabling both regulators and users to monitor solvency in real time and deter reserve misrepresentation. UAE's Virtual Assets Regulatory Authority (hereinafter known as ‘VARA’)and EU’s Markets in Crypto-Assets (hereinafter known as ‘MiCA’) and Singapore’s single currency stablecoins (hereinafter known as ‘SCS’) regime focus on a licensing and supervision framework. It will help to create transparency and stability. UAE's sandboxing framework helps to test the framework in a secure and controlled environment. Here, stablecoin issuers are only allowed to operate within pre-approved transaction corridors (specific partner countries or institutions) and under volume caps (monthly limits on total value moved). In India, specific FEMA-authorised dealer routes can be made which limits cross-border stablecoin transactions to approved jurisdiction and transaction volume. Using this, India can also better mandate reserve requirements with compulsory monthly attestations.
Reference may be made to MiCAs ‘Whitepaper’ framework, which describes the project, risk, functionality, etc, helps build investor trust and bring transparency to this whole process. The EU has also adopted the FATF travel rule. It is an important step that allows the identification of beneficial owners in cross-border transactions. India should also adopt the FATF travel rule by compelling Indian exchanges and custodian to integrate identity-sharing protocol with their foreign counterparts. This would allow Financial Intelligence Unit -India (Hereinafter known as ‘FIU-IND’) to track cross-border stablecoin with the same accuracy as applied to wire transfer. Japan has also started focusing on using stablecoin for domestic transactions in the area of E-commerce. All nations are gearing up for the use of stablecoin not only for international transactions but also for domestic transactions. Analysing the framework will help Indian frame its own. The challenge for India lies in the adaptation and implementation of these lessons to its unique macroeconomic and capital-control context. To operationalise oversight, India needs to adopt more advanced technological solutions such as AI-driven blockchain analytics.
IV. Incorporating AI & Blockchain Analytics
Taking on global regulatory frameworks—like the UAE's corridor system-based transaction structure, the U.S. GENIUS Act's reserve requirements, or the EU's implementation of the FATF Travel Rule—can serve India as a solid foundation to regulate stablecoins. Regulation on paper is only as effective as its enforcement. With the decentralised technology of stablecoins, ease of cross-border transfers, and the pseudonymous nature of digital wallets, the conventional compliance measures are inadequate. This is where blockchain analytics and AI intervene as enforcement mechanisms, allowing regulators to monitor, enforce, and adjust policies in real-time.
One of the most significant issues for RBI is the threat of leakage of capital accounts and loss of monetary sovereignty in case of USD-pegged or algorithmic stablecoins. They may be employed to circumvent the Indian rupee in cross-border transactions. Herein, after corridor-based models, such as those under UAE's VARA, are implemented in India, AI can be used to automate and impose these corridors using smart contracts and real-time checks on transactions. For instance, regulators could set pre-approved transaction corridors and volume limits between verified Indian and foreign entities. AI systems can then continuously adjust these ceilings based on the user’s historical risk, transaction frequency, or flagged behaviour, ensuring automated compliance with FEMA guidelines.
Global regulators have already begun operationalising this model. In the United States, regulators such as the FinCEN and NYDFS today require compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) using blockchain analysis technology. Such technology has been designed by RegTech companies such as Chainalysis and TRM Labs to trace wallet addresses to actual identities, identify suspicious collections of wallet addresses, and track intricate cross-chain transactions. This software identifies anomalies and traces the source and movement of stablecoins, preventing them from being used for illegal or grey-market purposes.
India can implement the same tools to create typologies of suspicious activity. Machine learning-based wallet attribution models can identify wallets associated with illegal exchanges, mixers, or privacy-extending protocols. These real-time surveillance measures would enable FIU-IND to track networks of pseudonymous wallets, preventing misuse while still appreciating the innovation that stablecoins provide.
Another sector where AI brings value is in reserve verification through automation. Implementing 1:1 reserve backing for stablecoins (such as the American model) isn't complete without mechanisms to monitor and verify them incessantly. AI systems can match self-reported liabilities with token circulation on-chain, sending out alerts in case a stablecoin is under-collateralised. Blockchain-based notarisation can be a tamper-proof ledger of these audits, enabling RBI to pick up de-pegging threats early and act in advance.
In addition, as India shifts towards applying the FATF Travel Rule through delegated regulations under the PMLA, AI can assist in enforcing it. Pattern recognition engines can identify chain-hopping, unhosted wallet usage, or mirror trades, typically employed to avoid origin-tracing measures. TRM Labs and Elliptic tools already assist worldwide regulators in detecting such laundering techniques within stablecoin networks—by tracing transaction behaviour against established risk patterns and labelling wallets participating in regulatory arbitrage.
V. Conclusion
For India, the journey towards stablecoin regulation has to be one of judicious enablement, managing fundamental risks without discouraging innovation. AI-driven blockchain analysis can be the foundation for this strategy, allowing real-time tracking of pre-approved channels, imposing quantity limits, monitoring evasion patterns, and checking reserves in an automatic manner. Such functionality permits regulators to eliminate operational risks while preserving visibility over domestic and cross-border flows. But technology by itself cannot fix macroeconomic issues such as dollarisation or crowding out of the e-rupee. These need a concerted monetary policy that demarcates the space for private stablecoins relative to the CBDC and leaves capital controls strong. The path ahead is a phased, progressive, pro-regulatory approach—grounded in legislative transparency, facilitated by supervisory tech, and orchestrated for interoperability of public and private digital currencies. By coupling policy vision with technological force, India can safeguard sovereignty, enhance confidence, and use stablecoins as a mindful instrument of economic policy, not as a revolutionary threat to the edges of its economy.
Note: This article has been reviewed by Mr. Anish Jaipuriar (Partner, Burgeon Law), at the Tier II Stage.
